2010 401k contribution limits have stayed the same for 2011. Contribution limits are subject to cost of living increases for every year that follows. The IRS announced the retention of 401k contribution limits due to the continued relatively low inflation.
Whether you have a traditional or a safe harbor plan, your 2011 elective deferral limit is $16,500, not a single cent of a difference from 2010 401k limit. An elective deferral is the official term used for the current income that you choose to forego in exchange for your employer’s contributions to retirement and other employment benefit plans.
If you started late in saving for retirement and have already reached the age of 50 or over, you are allowed to have an elective deferral of up to $22,000 this year for a traditional or safe harbor plan. This is due to the added benefit of catch-up contributions, which is termed as such because it literally is a chance for the older bracket of employees to “catch up” with their savings for retirement. The 2011 deferral limit for catch-up contributions is up to $5,500, still the same as that of 2010 401k. SIMPLE 401k contributors’ catch-up maximum is also retained from last year’s $2,500.
However, this additional benefit also means additional rules to follow. If you are employed by a single employer, you need to be sure that your plan permits catch-up contributions. If you are employed by two or more different employers, though, you can get this benefit even if none of your plans has any catch-up provision. You just need to be sure that you do not exceed the total elective deferral limit for the year.
In addition to the contributions you can make before taxes, you can also make another contribution after taxes, if your plan has provisions for it. Adding up your pre-tax and post-tax contributions, your total 401k contributions are also covered by elective deferral limit set by the IRS. 2010 401k had a maximum of $49,000 or 100% of your compensations, whichever amount is less. Just like the pre-tax and catch-up contributions, it has remained the same for 2011.
Financial experts advise people who would like to maximize the savings offered by 401k to push for the highest contribution they are allowed to give, mainly because the amount that you will put in for your retirement savings is taken before taxes and any other deductions. If you earn $2,000 a month before taxes and you plan to contribute $250 to your 401k, taxes will be deducted from $1,750 and not $2,000. Compared to other retirement plans, 401k makes things easier for you, since it helps you save up and even gives you a tax cut.